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Gov. Dennis Daugaard will give his annual budget address Tuesday in Pierre. 

PIERRE | Twenty years ago, South Dakota residents spent 15 cents of every dollar for health care. By 2016, they were spending 20 cents.

That is a major shift in South Dakota’s economy. One result has been less and less tax revenue for state government and public schools.

Here’s why: Medical services aren’t subject to sales tax in South Dakota.

Gov. Dennis Daugaard plans to talk about that situation and a variety of others Tuesday, when he delivers the annual budget speech to the Legislature.

“It’s one of the points we’re going to make on weakened sales tax,” Liza Clark, the governor’s commissioner of budget and finance, said Thursday.

Most details won’t be revealed until the governor begins remarks shortly after noon. 

State sales tax revenues weren’t meeting the Legislature’s initial expectations for the 2017 budget year. Lawmakers revised the estimate down during the 2017 session.

They also set new estimates for the 2018 budget year that began July 1. So far sales tax revenues have run lower than expected for several months.

From July through October, sales tax was supposed to produce $354 million. It generated $350 million instead, a shortfall of $4 million.

The contractor’s excise tax likewise is short so far.

The Legislature set the 2018 budget expecting $45 million from contractor tax for July through October. Instead $43 million has come in, a hole of $2 million.

The health-care shift came to light earlier in November during the public portion of a teleconference meeting by state government’s Board of Economic Development.

Members learned about it from Scott Stern. He is commissioner for the Governor’s Office of Economic Development. 

State economist Jim Terwilliger said Thursday that U.S. Bureau of Economic Analysis statistics showed the shift.

For calendar 2016, the effect from health care on state government’s budget was the equivalent “theoretically” of more than $80 million in potential state sales tax that went uncollected, according to Terwilliger.

The federal agency showed spending on outpatient services, hospital care and nursing home services climbed to 20 percent of the state’s economy during 2016.

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It was 15 percent in 1997.

Personal consumption expenditures in South Dakota totaled nearly $13.9 billion in 1997. Health care spending was nearly $2.1 billion.

For 2016, personal consumption in the state was more than $34.1 billion. Health care spending took up $7 billion of it.

Those numbers don’t include health care insurance, according to Clark. She and Terwilliger said insurance spending stayed proportionately steady over the 20 years.

The cumulative impact of uncollected state sales tax on health care services runs into the hundreds of millions of dollars.

More than 20 years ago, the Legislature approved taxing medical services at the suggestion of then-Gov. Bill Janklow. But lawmakers repealed the tax expansion during the same session.

Meanwhile, South Dakota government officials and many business people in the state now want the U.S. Supreme Court to consider whether states can levy sales tax on businesses that don’t have a physical presence in those states. That matter is pending.

Four of the nine U.S. Supreme Court justices must agree to hear it. State officials have estimated tens of millions of dollars in South Dakota sales tax are going uncollected each year because of the 1992 Quill decision.

Daugaard is expected to talk about that Tuesday as well.

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